Could Apple sell a $200 iPad mini, and how would investors react if they did?

Lately on iMore, and other websites, there has been a lot of discussion around the idea of Apple selling a lower cost tablet. So I thought it would be worth writing about this topic from the perspective of an Apple investor. Is a cheaper tablet a good idea? Is it necessary?

Absent an official Apple press release, we don’t actually know with 100% certainty that this will happen, but for the sake of argument let’s say it does. To me, the idea of a smaller iPad makes a lot of sense. I have an iPad and two BlackBerry PlayBooks in my house. Every one of these three tablets gets plenty of use, and I can see the use cases for large and small.

Besides that, Apple has a long history of successfully carrying multiple sizes. Just look at the MacBook Pro and Macbook Air lines. You have 11-, 13-, and 15-inches options (and until a couple of months ago, 17-inches as well). I’ve always said that tablets can come in multiple sizes. Once you pick an aspect ratio (whether it be 16:9 or 4:3, or something else), the size should just be an option. It has been this way in the TV industry forever. Why are tablets any different?

If you buy my argument that size is simply an option, why would a slightly smaller iPad deserve a significantly smaller price? How can Apple price a 7-inch iPad at $199 or $249 while asking the much larger price of $499 for the regular (new) iPad?

It’s probably not fair to compare the new iPad to an iPad mini either. If Apple uses the same resolution of the iPad 2 and similar spec’d components, then we should compare an iPad mini against a $399 iPad 2. But still, half the price for slightly smaller? What will this do to the company?

Let’s take a look at current iPad gross margins. Reuters reported on evidence coming out of the Apple vs. Samsung court case, saying:

Between October 2010 and the end of March 2012, Apple had gross margins of 23 to 32 percent on its U.S. iPad sales, which generated revenue of more than $13 billion for Apple, the filing said. Apple does not typically disclose profit margins on individual products.

Is this data actually accurate? I’m not convinced. Even at the 32% level, I have a hard time believing a $499 iPad costs Apple as much as $378 to manufacture, which is what the cost needs to be for a 32% margin. iSupply pegs the bill of materials + manufacturing on an iPad 3 16GB at $316.05, and an iPad 2 16GB at $240.10. Who knows how Apple defines gross margin in court statements. Separately, UBM TechInsights says Apple actually earns a margin of about 53% on the iPad 2.

That sure sounds more like the Apple I know. Premium prices, premium margins. But still, they do sell lower end products such as the iPod touch. Currently an 8 GB model of the iPod Touch sells for $199, and production cost is estimated to be around $150. That makes for a +30% margin on Apple’s lowest cost iOS device.

A $200 iPad Mini, to me, seems completely out of the question. Why in the world would Apple launch an iPad 2 quality product at an iPod touch price? Normally, within Apple, portability has been marketed as a feature, not a cost-saver.

If Apple was to sell an iPad at sub 30% margins, I think the stock would take a deep nosedive. There’s just no good reason for Apple to make such a move right now.

Perhaps months ago, when the Amazon Kindle Fire was released (sold at essentially zero margin, for $199) and the Google Nexus 7 was on the horizon (also sold at essentially zero margin for $199), Apple may have considered defensive moves to capture market share and keep the competitors out. But today? It doesn’t seem necessary at all. Even in China, Apple has institutional investors who would sell en masse. Wall Street would start puking out the stock. It’s really as simple as that.

Wall Street already understands perfectly well that the iPad has much lower margins than the iPhone. But Apple is still a company with 72.7% market share for tablets in China. Price is not limiting Apple’s market share, clearly.

My take is, we will see a smaller iPad. Reporting by iMore and others has pretty much confirmed this. But nobody seems to be as sure about the price point. I think Apple has already established market share leadership with the iPad and doesn’t need to cut prices significantly. I would be shocked if an iPad Mini hits the market at $299 or below. But at the $299 or above price point I think Apple can still earn reasonable margins, while opening up the market to much larger volume, and further cementing its market share lead.

Chris UmiastowskiChris was a sell side financial analyst covering the tech sector for over 10 years. He left the industry to enjoy a change in lifestyle as an entrepreneur, consultant, and technology writer.

Reader comments

Could Apple sell a $200 iPad mini, and how would investors react if they did?

I think $299 is the sweet spot. There is no reason for Apple to join the race to the bottom. I'm assuming from everything I've seen that it will essentially be an iPad 2 in a smaller form factor, able to do everything and run every app the 2 can. That, plus the fact that even the most casual consumer considers the iPad "the" tablet computer to own (no diss of Android - I'm just talking about the average person who doesn't read tech blog's perception) means that people will happily shell out an extra hundred bucks to own an actual iPad.

That $299 price also makes the most sense when looking at the whole iOS line. $200 Touch, $300 iPad Mini, $400 iPad full size and $500 iPad Retina. A very natural and defendable pricing structure.

Interesting article. I too agree strongly with Damitol that we're looking at a much higher price point than I see being discussed. $299 seems about right to me as well, when you consider their entire line of iOS products.

I think it has to come in around $200-250 or why bother. I really think its going to be more a larger iPod touch than a smaller iPad. I'm thinking it will be intended as more of a consumption device than the production device the iPad is; which is basically what all the other small tablets are.

"Is this data actually accurate? I’m not convinced. Even at the 32% level, I have a hard time believing a $499 iPad costs Apple as much as $378 to manufacture, which is what the cost needs to be for a 32% margin. iSupply pegs the bill of materials + manufacturing on an iPad 3 16GB at $316.05, and an iPad 2 16GB at $240.10. Who knows how Apple defines gross margin in court statements. "

Gross margin is exactly that. It is the gross margin after all costs. Not just the parts and materials costs. People who do not understand business get so confused when they look at these numbers that bloggers like isupply come up with. This does not include the R&D, Marketing, Accounting, Shipping, Where-housing and other multitudes of fixed costs that a business such as Apple would include in the cost of a product such as the ipad.

Rampant speculation of the release of an iPad mini on any number of websites, doesn't "confirm" or prove that the product exists or will ever exist. But for argument's sake, if Apple produced an iPad mini at the same resolution as the iPad 2 and sold it for $199, that would probably cause a bunch of people who have not bought a tablet yet to purchase an iPad mini and a bunch of people who already have Tablets, to add it to their tablet collection or replace other tablets that they own. Investors would surely enjoy the sales increase of Apple iPad products and that would likely cause an increase in share price. A win-win situation for Apple and a crushing blow of defeat to Microsoft's RT tablet, the Playbook, and Android tablets.

You're right that Apple would sell boatloads of iPad Minis at a $199 price point, but they wouldn't be making the profit that investors expect from Apple. Apple is all about their margins and selling at a break even point or razor thin profit isn't how they've accumulated more money than most central banks.

We old farts remember "55 or die" type T-shirts around Cupertino in the 1980s celebrating margins when the Mac was light years ahead of the PC. That is not to the tablet market will follow the same path, but Apple may have decided from that experience that a pure margin focus beyond a certain level is unsustainable.

Yep, I totally agree. Those rumors of it being 199 are to be laughed at each and every time they come up. Eventually the 2012 base model may drop to that level...after another version is released in a year. It would be absolutely idiotic for Apple to aim low or forgo their typical margins. They always compete in the high end of each market or segment they're in.

"Even in China, Apple has institutional investors who would sell en masse. Wall Street would start puking out the stock. It’s really as simple as that."

What are these statements based on? Sounds like pure speculation to me. This device will be thin and light. What does that make you think of? iPad or iPod touch? Apple is responding to the market with an entry level device that will lure new customers and keep existing customers in their ecosystem. iPad mini would be targeted at the Nexus 7 and other devices in the $200 range. Of course Apple won't sell the mini for $200. More likely at the $250/$300 price points, and they will still have a good margin on this. 32% is pretty darn good, just ask LG, Sony, and HTC if they would be happy with that margin.

I am also an investor and I think I'll trust the company with over 100b in the bank. Apple will be just fine, and so will the stock price.

"Is this data actually accurate? I’m not convinced. Even at the 32% level, I have a hard time believing a $499 iPad costs Apple as much as $378 to manufacture, which is what the cost needs to be for a 32% margin."

Jobs said he was willing to go thermonuclear on Android. He was willing to blow $billions. As others have pointed out, Apple will still make decent margins at $249. For $50 more, most people in the world will buy the Apple product. The iPad Air will crush Nexus 7, Kindle Fire 2 and whatever Nook comes up with.

Remember that Apple sells mostly hardware, yet their margins are at the same level (slightly better net margins) as software companies like Microsoft & Google. Traditional hardware companies like HP, Dell, Lenovo, Samsung, etc. have margins in single digits. Apple can shave a few points of margin here and still be in a very healthy range. As an AAPL investor, I have absolute faith in Tim Cook and crew.

Re: "How can Apple price a 7-inch iPad at $199 or $249 while asking the much larger price of $499 for the regular (new) iPad?"

Answer: Smaller screen, non-Retina resolution. You want the biggest and sharpest screen? Get the 3rd-gen iPad. You want low cost and a smaller form factor? Get the iPad Air or whatever it might be called.

I think the real question is "How can Apple justify $200 for the iPod touch after releasing a smaller iPad at $250?" I don't think they can. They'll either need to lower the price of the touch or eliminate it.

Lowering iPod touch pricing to make it a better value compared to a smaller, cheaper iPad would also make it a better value compared to the iPhone. And Apple won't do anything to cannibalize iPhone sales. iPhone is far more profitable for Apple than iPod touch. And, in the long run, an iPad mini could be far more profitable than iPod touch. Because it will crush any mini-tablet competitors.

So, I think Apple just might end-of-life the iPod touch. Then again maybe not. But when's the last time you saw a component leak for any iPod touch? Last year?

It depends on whether Apple want to stay at the premium end, or if they want to close the door. The risk may be that cheap high volume products end up catching up. At that price-point it would make it virtually impossible to sell any other tablet. If they combined this with a real effort to take enterprise then they lock the market down tight. Do they need to do that now? No. However, they could foresee a point where it becomes necessary an have chosen to act early. In terms of long term shareholder value this is low risk actually - so on that I fundamentally disagree.

The real question is whether a move like that would reflect a culture change at Apple - rather than being premium they would be ubiquitous! For that reason alone I think it is less likely, and I don't think they need to do that right now...but it is not so out of the question as is suggested...

I would not view an iPad Mini as much as a competitor to the iPad but as an extension of the line. While it might canabalize some sales I would think Apple would position it several ways:

1) A better Kindle device for people who want a reader / player but think the iPad is too big. That would be a market expansion move and rely on the strength of iTunes to make it a compelling alternative to the Kindle / Nook (plus you get Kindle and amazon video on it anyway).

2) A replacement for paper manuals in cars. Apple is moving the iOS ecosystem to cars, this gives them an in - initially as a replacement for manuals on higher end cars; ultimately as the in car display screen. Many dispaly screens are already about 7 inches so it's not like this would be a big jump.

3) They kill the Touch - the iPhone has pretty much replaced it for many consumers, killing it opens a niche for a mini.

This implies a less capable device that is more in line with the Touch model of preloading content rather than as a full featured always connected 4G iPad. With cars moving to integrated WiFi taht model works well as the car's content delievry device and navigation system as well.
Price (or margin) remains the key issue. I would gues they leave out some components from the iPad such as 4G and the retina screen to lower costs. A $175 manufacturing point (a bit more than a Touch to allow for a bigger screen and a tad more memory) implies a sales price of $250 (for 30%); which is close enough to a Kindle but still keeps with Apple's "our customers will pay a premium" model to create a viable consumer (and investor) product. If it is ahit volume will drive cost down somewhat as well.

Another thought on margins: if Apple can somehow make LTE fit into something that thin and also have enough battery to power it, then the extra $100-130 they would charge for LTE would pad overall margins for the device. $379 iPad Air LTE? I'll bet it'll be the most popular version.

I personally think that Retina is off the table for the iPad mini this year. I remember Steve Jobs saying that after they launched the Mac (the first Mac) that Apple fucked up by going after profits over marketshare, I don’t think they will make that mistake again, especially with iOS which will give them something that they couldn’t achieve against MS in the past. A dominant OS.
While I don’t think they will hit $199 as the margins will be too low, I think they will squeeze their margins and hit $249 for the 8gig, $299 for 16gig and $399 for 32gig (I don’t think they will do 64gig with the mini). They can price themselves a bit upmarket from the competition ($50) but I don’t think they can do $100 more, at low price points that is a big jump in price (50% of the Nexus 7 price).If Apple is serious about iOS domination they will hit $249 or lower. Tim Cook has already said 1) They will not leave a price umbrella for competitors when it comes to the iPad (if they price the mini at $299 for the base model, that’s exactly what they’re doing by giving the competition $100 breathing room) and during their earnings call Cook said 2) expect a squeeze on overall margins in Q4 (when iPad mini launches).
Apple isn’t going to make the same mistake that they did 20 years ago. They will go for marketshare aggressively and take wind out of the cheap Android tablet market. $249 base is likely IMO, $299 for the base? forget it. As for $199? I don't think that it will happen, the margins would be just way too low. They can afford to be $50 above the competition.

Also, as an investor with $20k of my hard earned in the company. I would be pissed if they took a minuscule margin and did a $199 iPad mini.